Unlike divorce, which only affects some people, death is an eventuality for everyone. Because of this, it’s even more imperative that all parties on the title to a home understand the implications of having a mortgage when you die, and the fate of your mortgage if that comes to pass. (Spoiler alert: someone has to pay for it.)
What happens to the debt?
In Canada, the mortgage stays with the home, not the person. So if you are the sole owner of the property and you die, then the mortgage doesn’t go with you to the grave, nor is it forgiven. It must be paid for from your estate.
If you bought the home with your spouse and you die, then more than likely your spouse will be the person who takes on the mortgage. Whether or not your spouse ends up keeping the house depends on a lot of factors, such as their income and personal desires, and whether or not they have to qualify for a new loan depends largely on the lender. If the mortgage is in the middle of the term and the other parties on the mortgage continue making payments, then more than likely the lender will continue with business as usual until the end of the term. Sarah Howard, mortgage agent at PropertyGuys.com, used to work for a mortgage lender and says that some lenders aren’t strict as long as they keep getting their money.
As to what happens when the term is up, “If you’re continuing to make the payments, it’s escalated through underwriting to say, well, what’s your capacity to pay? Did you get an insurance settlement that you now have a hundred grand in the bank, even though you’re a stay-at-home mom? Okay, cool, we’ll let this keep going for two more years,” Howard says.
“At the end of the term, the surviving partner will not have to re-qualify, it proceeds as a renewal, just as it normally would. If they choose to refinance, switch lenders or port the mortgage, they will be asked to prove income again,” says Susan Ashton, a mortgage broker with The Mortgage Group. “Provided the income is permanent (i.e. CPP), it can be used to qualify. If the surviving spouse is being paid out monthly, for life insurance, this cannot be used as income because it is not permanent – there is an end date/amount to the policy coverage.”
If you’re lucky, your lender won’t consider removing the deceased person’s name from the mortgage as breaking the term or apply any penalties for doing so. At the end of the day, they just want to make sure that they’re protected from risk now that the circumstances of your mortgage has changed and that the surviving spouse is still able to make payments. It’s also the lender’s responsibility to notify the insurer, if the mortgage is insured.
Paperwork
Of course, this all starts with the name of the deceased being removed from the mortgage and title. And how quickly this takes place depends on the diligence of the estate lawyer, mortgage broker, and/or family member in charge of the estate.
“When someone’s dealing with the estate and pulls up the property and sees that that person’s on title, that lawyer typically sends the death certificate in to the lender,” Howard says. “And then once the lender receives it – which isn’t usually until months after they pass because the estate usually takes a few months to settle – then the lender would take it into their hands to contact the existing party to say, ‘Okay, this other person has passed, what do you plan on doing with the house?’”
If your surviving partner or joint tenant is unable to pay the mortgage and goes into default, and your name is still on the mortgage, then it’s possible that the lender will look for payment from your estate. But don’t worry that the lender will automatically go to attack mode or want to foreclose on the home upon your death. That still only comes into play if the surviving owner defaults on the mortgage.
Sarah Albert, president and mortgage broker at PropertyGuys.com, says that in cases where a deceased spouse and/or co-borrower is still on title and mortgage but the lenders were never notified, “It can become quite a problem to rectify the situation when so much time has passed if the lender wasn’t initially notified.” If the lawyer doesn’t send that death certificate in the first place for whatever reason, she says, then eventually when that mortgage comes up for renewal or if the home is sold, the death certificate will be required at that point and could delay proceedings considerably.
Types of tenancy
If you have a mortgage with another person and your co-buyer are listed as joint tenants, then you have equal interest in the property. If this is the case and one of you dies, then the title is automatically transferred to the surviving joint tenant(s), tax-free, which is the case in most mortgages with a spouse. If you got a mortgage with someone as tenants-in-common, however, each of you owns a part of the property that you can do with as you see fit, including selling it to someone else. So if you are on the title as tenants-in-common and you die, then the beneficiary listed in your will/estate will become the new owner of your part of the property as opposed to the other tenant-in-common getting your portion.
Mortgage life insurance
There is a product called mortgage life insurance, which will pay off most, if not all, of your mortgage upon your death. There are downsides to getting mortgage insurance, though, including the fact that the premiums remain the same over the years, even as the mortgage gets paid down.
You can get mortgage life insurance when you’re approved for your mortgage, but there may be better options that are better suited to your situation. Term life insurance, for example, is a product that pays out upon your death to the person named as your beneficiary. That person can then do with it whatever they want, such as pay off the mortgage, or at least continue making mortgage payments for the time being.
How to prepare
Having a will is great, and is recommended by just about any estate planning professional worth his or her salt, but here are some issues that supersede a will. Even if you have written in your will that your home goes to your children, for example, your debts must be paid before they get the home. Your mortgage is obviously a debt that happens to be secured by the house, and other assets may have to be sold in order to repay your lender. But having a will in place is important so that you name an executor who will be able to contact and negotiate with your lender to discuss payment options, which may be necessary if you are the only person on your mortgage or your co-owner is unable to do so.
Whether you decide to have mortgage insurance or life insurance that will cover mortgage payments, don’t wait until the last minute to make sure that you have some kind of coverage. And, once you are covered, make sure that your spouse or anyone else who shares the title and the mortgage know the details of that coverage.
“Often times it’s just a matter of the other person having all the records,” Howard says. “Sometimes [estates] can take a long time to settle because one spouse doesn’t even know where the insurance policy is or how it’s being paid, or how much is covered or isn’t knowledgeable in that sense. So that takes longer and the cash flow in the meantime is what you’re in danger of defaulting on your mortgage. Having those things all organized to know exactly where your files are and who you’re supposed to call, who’s your life insurance representative, who’s your mortgage broker, who’s your lender contact, that kind of thing.”
Ashton agrees, noting that she’s been called upon to be a sounding board for clients who have suffered a loss and has had ongoing conversations with them about the ‘what-if’s down the road.
“Every situation is different and the client may not even know what they want to do, so I’m just there when they have questions, and I am constantly following [up] so they aren’t feeling overburdened,” she says. “Often people are told not to make any major decisions for a year after they lose their spouse but in reality, a year can be too long if they can’t realistically afford to stay in the house.”
Grief often gets in the way of the to-do list that appears after someone has died. Having the proper insurance in place alleviates the burden of financial stress and uncertainty for the survivor, and, as Ashton says, “gives them time to grieve and move forward. And, unfortunately, just because someone is young, doesn’t mean they are immune to death or disease.”
In life, the most prudent people prepare for the unexpected, and when you own such a large asset, there are many things that could upset that stability, such as a hike in mortgage rates, loss of employment, a sudden illness, or death. If you and your spouse and/or anyone else on your mortgage understand what happens to that mortgage if one of you were to pass away, no one will be blindsided should the unfortunate occur.
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